Miles Loss, Mortgage Broker- Interest Rates

WHAT WILL MY INTEREST RATE BE?

What are your interest rates?

What is the best interest rate you can offer on a 30 year fixed?

My aunt’s, sister’s, father’s, mother got a rate of…

Do you want to know what interest rates are all about? What really determines your interest rate? How can you obtain a better rate?

In order to understand this you need to understand some basics of underwriting. What does this person called an underwriter, the one who reviews my loan file and approves my loan, really do?

Simply stated underwriters look at two basic items- 1. The credit worthiness of the borrower (willingness and ability to pay back the loan) and 2. The asset being used as collateral (the house). Number two is easy. This is simply the value of the home you own or are going to purchase. This value is determined by an appraisal. Now let’s look at number one. Number one is the item that will have a large affect on your interest rate.

What the Lenders Look for…

There are six basic factors that lenders look for when underwriting a loan. Now, all the underwriter is trying to do is determine the risk factor involved in loaning you money. Are you a low-risk, a high-risk or anything in between. The higher the risk translates to a higher interest rate. The six basic qualifying requirements used to determine risk, and as a result your interest rate are listed below:

Employment- The most important factor here is a stable employment history. Two years of employment with the same employer is not required but is preferred. If you have not been working at a specific job for the last two years they look for the number of years in that field. Basically do you have a steady job giving you steady income?
Loan to Value (LTV)- This is the sales price vs. the amount of money borrowed. On a refinance it would be the appraised value vs. the amount of money borrowed. This would be determined by how much you would “put down” for the property or how much equity you have in the property you are refinancing. For example, if you were to put a $10,000 down payment for a $100,000 property, this would be a 90% LTV because you made a 10% down payment. NOTE: answer to the question I am asked frequently… “What if the appraised value is greater than the sales price, can I use that to get a better rate.” Unfortunately not, the underwriter will take the sales price or appraised value, whichever is lower. This guideline is applied universally by all lenders. So if you purchase a property that is way below appraised value you just got a good deal and will have a good pay day when you sell or refinance. The lower the LTV, the lower the risk and as a result the lower the interest rate. NOTE: 100% Financing is available.
Debt to Income (DTI)- This is your debt divided by how much you earn (before taxes) per month. If you have debts of $500 a month and income of $5,000 your DTI would be 10% ($500 / $5,000 = 10%). Your new mortgage payment including taxes and insurance would be added to the debts to see what your Debt to Income Ratio would be including your new debt- your new mortgage payment. For example if your new payment, PITI- that stands for Principal, Interest, Taxes and Insurance, is $2,000 a month. Using the above example, add that $2,000 to the $500 of monthly debt you already have, that would be $2,500 in monthly debt. You now do the math for the debts divided by income ($2,500 / $5,000 = 50%). Your new Debt to Income Ratio including your new mortgage payment is 50%. This is really not that complex and is done to see if you make enough money to cover your current bills and your new mortgage payment. The higher the ratio, the greater the risk and as a result the higher the interest rate.
Credit Score- This is a number score that is assigned by the credit bureaus. If the other factors shown here are strong the credit score can be lower and you would still qualify. The main score considered is that of the primary borrowers. The lower the credit score, the greater the risk and as a result the higher the interest rate.
Reserves- This is how much money you have at your disposal. This could be savings, stocks, bonds, etc. The underwriter uses this to see how you handle your finances and to see if you can make it through one of life’s little bumps in the road. If reserves are used for your loan, a 30-60 day average of what you have in your bank accounts is usually used- some programs will just require you to show that you have the money to close and others will not ask for anything. If a large deposit is made in that 30-60 day period the underwriter would typically want to know where this money came from. Some people think the underwriter is trying to see if the money was reported on your taxes or gotten legally or is “looking into my personal life.” None of these are true. The underwriter simply wants to make sure that you did not obtain a new loan (more monthly debt) that has not show up on your credit yet and is not known about. The more the reserves, the lower the risk and as a result the lower the interest rate.
6. Payment Shock- This is the difference between your old and new monthly payment. If you are currently paying $800.00 a month and your new monthly payment is $4,000. This would be considerable payment shock. The greater the payment shock, the greater the risk and potentially a higher interest rate. Payment shock along with the other items listed here would be factored into your interest rate and be used to determine whether or not you actually qualify for the loan.

The second item that determines your interest rate

The higher the risk translating into a higher interest rate is what this section is all about. For a traditional loan, documentation is provided to support income, assets and employment. For the convenience of the borrower there are other loan options that only require partial or no documentation for these items.

Stated Income: Income is stated by the borrower and not verified. Assets are verified.
No Ratio: No income is stated. The income section of the application is left blank. For this reason the Debt to Income Ratio (see above) cannot be calculated. Therefore this is a No Ratio loan. Assets are verified.
Stated Income/ State Assets: With this type of loan both assets and income are stated but not verified.
No Income/No Assets: Neither income nor assets are stated. They are left blank on the application and are not verified.
No Income/No Assets/No Employment (No Doc): No employment, income, or assets are stated on the application. Neither are they verified.

As you can see, when you go from one to five on the list above less is disclosed to the underwriter. As a result the risk is higher and so is the interest rate.

The last factor, out of our control…

This fits under the category commonly referred to as “the cost of money.” Interest rates are the cost of money. This is what you pay to borrow money. This is where things can get a bit complicated so I am going to keep this simple. The right lender for you would be a true professional. I am sure you would not want to settle for anything less. The following questions will give you more information about factors that contribute to determining the interest rate of your mortgage. These questions can also be posed to those who you question their professionalism in the lending industry.

Here are three simple questions a professional lender absolutely must know the answers to. If they do not know the answers, run -- don’t walk -- to a lender who does.

What are mortgage interest rates based on?
The correct answer is “Mortgage-Backed Securities” or “Mortgage Bonds,” Simply stated Mortgage-Backed Securities are a bunch of mortgages packaged together so they can be sold. They receive money from the interest portion of the mortgage payment everyone makes who has a mortgage. As you can see and very simply stated- the demand of the investors buying these Mortgage-Backed Securities would determine the rate. For example if a 6% mortgage is no longer considered a good investment; the rate may move up to 7% which is now considered a good investment. Remember, banks sell their mortgages which is where Mortgage-Backed Securities come from. This makes sense. Just think about it, wouldn't the banks run out of money after they did a number of mortgages. The answer is yes. The solution is to sell those mortgages to free up money to do more mortgages. You may hear a partially correct answer which would be the 10-year Treasury Note. A 10-year Treasury Note is one of the ways our government raises money. Lets’ say they want to raise 1 billion dollars. They may offer 10-year Treasury Notes for sale paying a certain interest rate. Investors would buy these notes to make interest on their money. In reality these investors are simply lending money to our government in return for interest paid by the government.

What is the next economic report or event that could cause interest rate movement?
Economic events such as the release of the monthly Jobs Report and other reports that I am not going to get into to keep this simple, can cause interest rates to change dramatically. A professional lender will have this information at their fingertips. I normally do not get into this with clients and do not post this information on my site as it is simply too confusing for most. When you see financial experts on CNN talk about all these strange sounding reports and indexes, this is what they talking about. They are all interrelated and all affect mortgage rates.

When the Fed “changes rates,” what does this mean, and what impact does this have on mortgage interest rates?
The answer may surprise you. The Fed (Federal Reserve) can only control two rates, the “Fed Funds Rate” and the “Discount Rate.” The Fed Funds Rate is set by the Fed and determines the rates we pay on our credit cards and short term loans- Prime Rate. The Discount Rate is the rate banks pay when they borrow money from other banks and is lower than the Fed Funds Rate- they borrow money for a lower rate then they lend it to you. Both are very short-term rates that impact credit cards, credit lines, auto loans and the like. Mortgage rates could at times, actually move in the opposite direction as the Fed change. So what the Fed does can impact interest rates for mortgages; however, the Fed does not directly determine mortgage interest rates.

What does all this mean to you?

We all know that at times you can be barraged with mortgage information. What I am trying to do here is teach you to make a good decision on the right lender. Now you know what is involved in determining your interest rate. Now you know when a loan officer just throws rates at you without looking at your credit, asking about your employment, your income and other items is not quoting you an accurate rate. This is your mortgage; you need to make informed decisions.

The best loan for you would be the one that is the right personal financial strategy for you, is prepared as accurately & professionally as possible, and closes in a timely manner. We both know that a rate quote that is given with obtaining little or no information from you and sounds too good to be true, probably is. In this case a number is just being thrown out at you to “reel you in.” The big surprise will come later when you receive the real numbers and with some unscrupulous lenders and brokers could be right before closing when it is too late for you to do anything about it. This is commonly referred to a “bait and switch.” A derogatory term.

A wise person once said, “Who shops the longest will end up with the biggest liar.”

I hope you found this information useful and are one step closer to making an informed decision.

Miles Loss
Licensed Mortgage Broker
Residential & Commercial Lending
contact@milesloss.com
(727) 235-1708

Florida Mortgage | Florida Refinance | Florida Home Purchase